Debt and poverty

Now that the big national debt battle is over – for now, anyway – open your wallet and take out a $20 bill, if you’re fortunate enough to have one in this rotten economy. On the front of the bill is the image of a solemn, skinny, gray-haired guy famous for his evil temper. That’s Andrew Jackson.

I point him out to you because he’s the only American President ever to have paid off the national debt. In 1835, except for a few nickels and dimes, he finally paid off the debt that this nation had incurred even before the country was born. We’d borrowed a ton of money from the French to win our independence from the English. A good many people, and I know a number of them, believe that the national debt is a relatively new occurrence. Well, wrong. We’ve had one from the start, until Jackson wrote that final check to the French.

The problem was that immediately after Andrew Jackson eradicated the national debt in 1835 we went right into a depression that sent the national debt soaring again. We couldn’t cut the debt down until the period between 1852 and 1857, when we trimmed the national debt by 59 per cent. Another depression began that very year. The Civil War drove up the national debt another 33 per cent. By 1873, the politicians had reduced the debt by 27 per cent. Then another depression hit, and the debt rose again.

The historical fact is that every time the country has cut the national debt we’ve gone into a big financial slump. The Great Depression began right after the national debt had been cut by 36 per cent, ending in 1929. That’s when the stock market crashed and everything else in the economy promptly hit the fan.

What’s the point? Just this:

Countries, like households and businesses, incur debt. It’s a natural process. Some of that debt is bad; some of it is good. If you borrow money to buy an asset that’ll increase in value to a level that exceeds the cost of the debt, then that’s good debt. Historically, for individuals, a mortgage has been a good debt while credit card debt has been bad. A business loan to improve market share is generally good debt. The financial history of this country shows us – and you can look this up — that we’ve paid down debt in good economic times and run it up in bad, like recessions, wars or periods of international conflict. Ronald Reagan, for example, increased the national debt by 50 per cent in killing off the Soviet Union and ending the Cold War.

That’s one reason that the framers of the U.S. Constitution didn’t include a balanced budget requirement in that document, although 49 or the 50 states have them. The framers understood that, for a country as opposed to a state, calamitous events can occur with no notice – Pearl Harbor, for instance – that will require a ton of deficit spending in a big hurry.

After Pearl Harbor, the government borrowed and spent enough money to double the country’s economic output. Basically, that’s how we won the war. We out-produced the Germans and the Japanese. Much of the current furor over the national debt is generated by the fact that the debt is now about 95 per event of U. S. Gross Domestic Product. At the end of World War II, the national debt was 122 per cent of GDP. Not only had we won the war, but we’d also ended the Depression along the way.

Fast forward to the present: Germany, the healthiest economy in the western world, carries a national debt of 80 per cent of its GDP and has an unemployment rate of 7.4 per cent, compared to our 9.2 per cent. Japan, the word’s third-largest economy, carries a national debt of nearly 200 per cent of its GDP. Japan’s unemployment rate is 4.6 per cent. Japan has some unique problems – a population with a median age of 41, the oldest in the world, while ours is about 35. Plus, we have immigration bringing in younger people to expand the economy. They don’t. That’s why their huge debt is such a problem even though they’re doing better than we are right now. That won’t be the case later on.

The reality is that our national debt is so high now because we’ve lost 15 million jobs from our economy over the past few years. Most of those 15 million former taxpayers are now tax users. If we had them in jobs producing taxes our national debt would be nowhere near 95 per cent of GDP because we would be spending less and because we would have more tax revenue coming in. In short, the argument that we have a spending problem instead of a tax problem is wrong. We just don’t have enough people working and paying taxes. That’s what’s really wrong with our economy and our national financial situation.

Historically, cutting spending or raising tax rates during an economic downturn has worsened matters. There’s no reason to believe that anything different will happen now that we’re cutting spending. We need about 2.5 per cent annual increase in our GDP every year just to accommodate the increase in our population. We’re nowhere near that now, and there’s no sign that anything will get better any time soon.

The polls tell us that about 70 per cent of Americans are worried about the size of the debt. They should be. It’s a legitimate worry. But it’s not the only worry and certainly not the biggest. We should be much more worried about the shortage of taxpaying jobs in this economy. If we had those 15 million jobs back, we wouldn’t have a debt problem. And, the way things are going — with politicians focused exclusively on the debt instead of on ways to expand the economy and bring back jobs — we’re going to have to live with these problems for as far down the road as any of us can see.

Debt and poverty aren’t necessarily the same thing. That’s where Washington is really letting us all down.